Taiwan Battles Huge Trade Surplus

The economy here is booming, but government officials say it needs fixing because of the threat of overseas competition and pressure to reduce a huge trade surplus.

“We’re thinking . . . it’s a good time to review our overall economic structure,” said Economic Affairs Minister Lee Ta-hai.

A commitment to change may seem odd because the economic growth rate last year was nearly 11% while unemployment was negligible. Per-capita income was $3,438 in 1986, one of the highest in Asia.

The increasing affluence is visible everywhere in Taipei, where expensive foreign cars are common in the city’s traffic, and fancy continental and Chinese restaurants are crowding out noodle stalls.

But the success is creating problems for this nation of 19.5 million people, which has long since left behind a sugar cane-based economy to become an industrialized country.

Small and medium-sized labor-intensive companies producing electronic components, textiles and footwear have helped create a trade surplus that last year reached $15.6 billion and continues to grow.

The country’s foreign exchange reserves have increased at a dizzying speed and now total about $58 billion--said to be the third largest after Japan and West Germany--nearly double the amount of a year ago.

Much of that money has flowed from the United States. The $166.3-billion U.S. trade deficit last year has led to strong protectionist sentiment among congressmen in Washington.

Such pressure cannot be ignored by Taiwan, which relies heavily on U.S. trade for its economic prosperity and American good will to counter the political isolation that stems from the Nationalist Chinese claim that they are the legitimate government of mainland China.

Largely in an effort to alleviate that pressure, Taiwan has announced tariff reductions and import ban removals on hundreds of items ranging from household appliances to peanuts.

And after nearly three decades in which the Taiwan dollar was tied to the U.S. dollar at roughly the same rate, central banking authorities have allowed the local currency to appreciate about 20% against the U.S. dollar since January, 1986.

Such movement makes local products more expensive overseas and foreign goods cheaper here.

The changes are occurring as Taiwan’s manufacturers, already paying rapidly rising wages, face stiffer competition from other Asian nations that also produce mainly labor-intensive, inexpensive goods.

That competition is even keener now because the currencies of other exporting Asian nations, such as Hong Kong and South Korea, are appreciating not as much or not at all against the U.S. dollar.

As the resulting pressure to switch to more automated industries that produce higher-quality and high-technology goods intensifies, Taiwan officials face a series of perplexing questions.

One of them is how to get small proprietors who have been making plastic shoes profitably to make computer chips.

Another is finding money to invest in such projects. Although the central bank holds billions in foreign reserves, it argues that it cannot spend the money.

Most Taiwan factories are too small to conduct research and development, and Economic Minister Lee believes that the government must help by pooling resources. One example, he said in an interview, would be to encourage the middle class, which now saves up to 40% of earnings, to invest in worthy projects.

One sign of the government’s increasing willingness to shift economic policy was the Cabinet’s proposal May 21 for easing longstanding controls that require all foreign exchange earnings to be converted to Taiwan dollars.

The change was brought about by the inflationary pressure caused by the flood of Taiwan dollars entering the market--the money supply is growing at an annual rate of 52%--and by foreign anger over the trade imbalance, which the massive reserves have come to symbolize.

One prominent economist who has argued strongly against continuing the accumulation of foreign reserves placed in U.S. bonds and Treasury bills is S. C. Tsiang, president of the government-funded Chung-hua Institution for Economic Research.

“This is indeed a very foolish way of investing the nation’s savings in the face of many crying needs for investable funds to raise our industrial productivity to the level of advanced countries (and to) combat steadily worsening pollution problems,” he said in a recent speech.

Strict foreign exchange controls have been in force since 1949, when the Nationalist government moved here after losing to the Communists on the mainland. The controls were intended to ensure that Taiwan could pay for its defense if the Chinese Communists ever attacked.